[Anonymous]

Hi All,

I am working on a presentation on earnings management. One article I read said that companies can overproduce inventory in order to lower COGS expense. I must be drawing a blank here, but how does more inventory lower COGS?

[LongShot]

I have no doubt someone here will give you better and more complete answer, but my initial thought is that increased production will lead to a lower amount of fixed overhead per unit which would lead to lower COGS.

FAR - 75
AUD - 72; 87
REG - 64; 74; 84
BEC - 88

Done!!

[LongShot]

I have no doubt someone here will give you better and more complete answer, but my initial thought is that increased production will lead to a lower amount of fixed overhead per unit which would lead to lower COGS.

FAR - 75
AUD - 72; 87
REG - 64; 74; 84
BEC - 88

Done!!

[Anonymous]

@LongShot is right. Under absorption costing, you allocate your fixed overhead costs to the units sold. If you overproduce inventory, then you don't sell all of the inventory produced during the current period. This means that a portion of your fixed overhead expenses is assigned to ending inventory rather than fully expensed as COGS.

[Anonymous]

@LongShot is right. Under absorption costing, you allocate your fixed overhead costs to the units sold. If you overproduce inventory, then you don't sell all of the inventory produced during the current period. This means that a portion of your fixed overhead expenses is assigned to ending inventory rather than fully expensed as COGS.

[stoleway]

Using the FIFO inventory method can result in a higher COGS, especially when market prices of the product bought or produced are increasing. Do more research on how FIFO can increase your COGS

REG -63│ 84!!
BEC- 59│70│ 71 │78!
AUD- 75!
FAR- 87!

Mass-CPA

[stoleway]

Using the FIFO inventory method can result in a higher COGS, especially when market prices of the product bought or produced are increasing. Do more research on how FIFO can increase your COGS

REG -63│ 84!!
BEC- 59│70│ 71 │78!
AUD- 75!
FAR- 87!

Mass-CPA

[Anonymous]

Wouldn't LIFO produce a higher cost of goods sold in a period of rising prices?

[Anonymous]

Wouldn't LIFO produce a higher cost of goods sold in a period of rising prices?

[stoleway]

@benboy12

Youre right, it was an oversight

In a period of rising prices, LIFO will result in Lower Income which means Higher cost of goods sold.

But OP was asking about LOWER COGS

REG -63│ 84!!
BEC- 59│70│ 71 │78!
AUD- 75!
FAR- 87!

Mass-CPA

[stoleway]

@benboy12

Youre right, it was an oversight

In a period of rising prices, LIFO will result in Lower Income which means Higher cost of goods sold.

But OP was asking about LOWER COGS

REG -63│ 84!!
BEC- 59│70│ 71 │78!
AUD- 75!
FAR- 87!

Mass-CPA

[How many letters do you need]

Agree with Bruins, sort of. One method of allocation is to allocate based upon units produced (not units sold). Those costs are stuck in inventory until you sell the product, and at that point those overhead costs are essentially recognized as a portion of COGS.

Example: You have $1M in annual overhead costs and plan to sell 1M units, so in a perfect world you would produce 1M units and attach $1 per unit in terms of overhead. In the real world, however, we are usually given some leaway because you want some padding in case your sales forecast is a little off. Let's say you want to be devious and lower your COGS some, so you produce 2M units knowing that you will never sell all of that. Well now, you attach $.50 per unit instead of a dollar. As the units are sold, that's a $500K savings in COGS for the year. The remainder stays stuck in inventory.

It's a devious earnings management tool, which is why most companies nowadays elect to go with a different allocation method (usually an OH rate as a factor of labor hours). Hope that helps!

MBA,CMA,CPA, CFF?, ABV?

[How many letters do you need]

Agree with Bruins, sort of. One method of allocation is to allocate based upon units produced (not units sold). Those costs are stuck in inventory until you sell the product, and at that point those overhead costs are essentially recognized as a portion of COGS.

Example: You have $1M in annual overhead costs and plan to sell 1M units, so in a perfect world you would produce 1M units and attach $1 per unit in terms of overhead. In the real world, however, we are usually given some leaway because you want some padding in case your sales forecast is a little off. Let's say you want to be devious and lower your COGS some, so you produce 2M units knowing that you will never sell all of that. Well now, you attach $.50 per unit instead of a dollar. As the units are sold, that's a $500K savings in COGS for the year. The remainder stays stuck in inventory.

It's a devious earnings management tool, which is why most companies nowadays elect to go with a different allocation method (usually an OH rate as a factor of labor hours). Hope that helps!

MBA,CMA,CPA, CFF?, ABV?

[Author]

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